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Retail Supplier, Which Was Subject To Prior POLR Drop, Says Not Possible To Get New Investment, Must Terminate Business
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In a filing with the Massachusetts DPU ("Department), Union Atlantic Electricity, LLC (UAE) stated that, "at this juncture it will not be possible to get new investment in UAE, and the business must terminate."
As previously reported, Union Atlantic Electricity had previously defaulted on its ISO-NE wholesale market obligations, which Union Atlantic Electricity alleged was the result of the bankruptcy of its supply and credit provider, Clear Choice Energy. Due to the default, Union Atlantic Electricity customers were transferred to default service
In its filing with the DPU, Union Atlantic Electricity alleged that it had communicated with the DPU about a plan to recapitalize the company and make ISO NE, Department of Energy Resources, and UAE customers whole. Union Atlantic Electricity alleged that the DPU's proposed resolution required UAE to cure those obligations in the immediate term, but to delay resumption of UAE's license and obligations for as much as a year afterwards. UAE explained that the Department’s conditions would make it impossible to obtain additional capital, as no equity investor in a company as distressed as UAE would wait for months before revenue could come in. UAE alleged that, "UAE thus provided a proposal in response to the Department’s proposal that honored the Department’s concerns, but adjusted for the realities of getting the new investment that was the only viable path to making ISO NE, DOER and customers whole. Instead of responding to UAE’s proposal, the Department filed [a notice of probable violation proceeding]."
In its filing with the DPU, Union Atlantic Electricity alleged as follows:
"Since obtaining its license, Union Atlantic Electricity, LLC ('UAE') had been
operating in Massachusetts in full compliance with all of its legal obligations, meeting the
highest standards of customer service and consumer protection. Unfortunately, the
misconduct and ultimate bankruptcy and dissolution of UAE’s senior lender have led to
the destruction of UAE’s business, as it did for numerous other Energy Service
Companies ('ESCOs') borrowing from that lender.
"Like most ESCOs, UAE relied on a supply and credit facility to provide its
customers competitive rates and reliable service. Pursuant to UAE’s Supply Agreement
with Clear Choice Energy, LLC ('CCE'), CCE was obligated to fund UAE’s supply
obligations, including posting of collateral and purchase of wholesale commodity at the
ISO NE level, and purchase of renewable energy credits at the retail level. Commodity
obligations were met through a combination of spot market purchases and bilateral
transactions, and UAE pursued a conservative risk management policy to ensure reliable
service for customers. Under the Supply Agreement, when UAE proposed a hedge
transaction with CCE, CCE was obligated either to transact or to decline in writing to
transact within a short window. CCE was also obligated to maintain its creditworthiness,
and its line of credit with its senior lender, Macquarie Investments US, Inc.
('Macquarie').
"To secure repayment of funds borrowed to purchase commodity, UAE granted
CCE a security interest in its assets, and directed customer payments from utilities to a
lockbox account controlled by CCE. CCE would release funds from the lockbox account
to UAE’s operating account for payment of operating expenses and purchase of
commodity. As is typical in these arrangements, UAE’s only remedy if CCE fails to
release funds from the lockbox account in accordance with the Supply Agreement is to
terminate the Supply Agreement and pursue legal remedies for breach of contract.
"In the winter of 2017 and 2018, from approximately 12/17/2017 until a hedge
transaction was completed for January and February 2018, UAE attempted to finalize a
hedge – during all of which time CCE failed to transact in accordance with the Supply
Agreements, and the cost of hedging rose dramatically. January and February are the
highest risk months of the year for ESCOs, and forcing an ESCO to wait until the last
minute to hedge for those months invariably produces substantial losses. UAE’s losses
from this failure to transact were $367,516.
"This was a tremendous blow for a company that only serves 5,000 residential
customer equivalents (RCEs). Nonetheless, due to its history of careful planning and
prudent operation, UAE was able to continue serving its customers without disruption. It
was, however, more reliant on CCE disbursements to its operating account than in the
past, due to borrowings necessitated by CCE’s breach of contract.
"In late 2017, UAE entered into a transaction with Next Era energy and ultimately
satisfied/retired a portion (Class I, Class II, and Class II waste) of its Massachusetts
renewable energy obligations. Unbeknownst to UAE, by 2018, CCE had dramatically
overextended itself, in what appears to have been a severe violation of its
creditworthiness covenants. Beginning early in that year, CCE began severely restricting
or terminating altogether disbursements to the operating accounts of the roughly 25
ESCOs who had supply and credit facilities under CCE and its gas industry affiliate, Big
Apple Energy, LLC ('BAE'). UAE timely sought funding in the first quarter of 2018 of
$246,150 to meet its Solar Rec obligations under the Massachusetts renewable portfolio
standard, but CCE refused to release the necessary funds. This was a clear breach of
CCE’s contract. As UAE continually sought for CCE to fund the Solar RECs and the
retirement date approached, the market price for them steadily increased. CCE continued
failing to release funds until it was no longer possible to meet RPS requirements through
REC purchase, and UAE faced the requirement of paying an Alternative Compliant
Payment that was $192,850 higher than the Solar REC prices originally requested from
CCE. In total, CCE’s failures to transact and to fund REC purchase had resulted in
roughly $806,000 in damages and excess debt.
"On August 27, 2018, under imminent threat of foreclosure from Macquarie, CCE
and BAE filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in the
U.S. Bankruptcy Court for the Eastern District of New York, in Central Islip. Right
before the petitions were filed, Macquarie swept all funds out of CCE’s and BAE’s
accounts, in order to wipe out claims that client ESCOs had for return of tax and margin
trust funds held by CCE and BAE.
"CCE and BAE proposed to continue supplying and funding their client ESCOs
during a transition period, allowing for an orderly unwind of the credit facilities and a
transition of the ESCOs to new credit facilities. In general, CCE and BAE were
successful in getting the Court’s approval of that approach. A combination of the
timelines in the bankruptcy process and errors on CCE’s part did result in payment
defaults with ISO NE in August and September. On each occasion, UAE reported
accurately to the Department what was occurring in the bankruptcy process. UAE
conveyed to the Department CCE’s assurance that payments to ISO NE would be timely
made in the future, and such payments were in the budget that CCE provided to the
Court. The Court approved that budget. During this period of the bankruptcy, CCE and
BAE reserved the right to accept or reject executory contracts, such as the supply
agreements with Client ESCOs. While many of the ESCOs, including UAE, moved for
early rejection of the agreements so they could transition to more stable credit facilities,
the Court did not issue any orders approving rejection of ESCO contracts until November
2018.
"UAE took the necessary steps to line up new supply and credit facilities, through
a combination of partnerships with Emera Energy Inc. and Capital Foundry Funding,
LLC. UAE felt this combination would be especially good for its customers, because
unlike CCE, Emera would be the entity charged directly by ISO NE for wholesale market
obligations. Emera has a high degree of creditworthiness and a long history of spotless
operation in the New England markets. Throughout September, UAE had every reason
to believe that it would make the transition to new supply and credit facilities without
disruption to its customers.
"On September 27, 2018, the Court issued an order regarding CCE’s and BAE’s
continued use of Macquarie’s cash collateral to service client ESCOs. CCE and BAE
could pay client ESCO obligations through October 31, 2018, two days before the Court
would hold a final hearing on the ESCOs’ rejection motions. Then, sua sponte, the Court
also ordered that UAE could no longer receive funding from CCE, without Macquarie’s
consent, because CCE’s and BAE’s principal, Victor Ferreira, had a minority equity stake
in UAE. UAE and Ferreira moved quickly to sever his equity stake in UAE, while UAE
sought Macquarie’s consent for continued funding. Continued funding was in
Macquarie’s best interests, because UAE was selling power at a profit, and cutting off
funding and sending UAE customers back to utility service would lead to less money
being available to Macquarie and other creditors from CCE’s estate. UAE also moved
the Court for reconsideration, but all requests for reconsideration were summarily denied.
Macquarie refused to consent, apparently driven primarily by animosity toward Mr.
Ferreira.
"These surprise developments led to further default with ISO NE. ISO NE sought
relief from the automatic stay in order to terminate UAE’s membership, which motion
was set for hearing November 2, 2018. UAE was on track to cure by that time, however,
as it finalized its agreement with Emera. However, one or two days before the transition
to Emera was to occur, ISO NE raised a new issue regarding collateral posting. UAE and
Emera worked to resolve the issue with ISO NE in order to ensure that UAE’s transition
to a subaccount status with Emera could occur, and disruption to UAE customers could
be avoided.
"Unfortunately, ISO NE, Emera and UAE were not able to find a solution to this
issue. On November 2, 2018, the stay was lifted, and ISO NE began the process of
terminating UAE, which in turn would lead to the return of UAE’s customers to utility
service. The combination of CCE/BAE’s misconduct and the bankruptcy process drove
at least a quarter of CCE’s client ESCOs out of business.
"These events also left UAE unable to continue operation without an additional
infusion of capital. UAE communicated with the Department about a plan to recapitalize
the company and make ISO NE, DOER, and UAE customers whole. The Department’s
proposed resolution required UAE to cure those obligations in the immediate term, but to
delay resumption of its license and obligations for as much as a year afterwards. UAE
explained that the Department’s conditions would make it impossible to obtain additional capital, as no equity investor in a company as distressed as UAE would wait for months
before revenue could come in. UAE thus provided a proposal in response to the
Department’s proposal that honored the Department’s concerns, but adjusted for the
realities of getting the new investment that was the only viable path to making ISO NE,
DOER and customers whole. Instead of responding to UAE’s proposal, the Department
filed this proceeding.
"As UAE has explained to the Department, at this juncture it will not be possible to
get new investment in UAE, and the business must terminate. UAE’s remaining assets
consist almost exclusively of claims against the CCE and BAE estates. UAE expects to
distribute any proceeds from those claims to its creditors, and anticipates that the amount
of the proceeds will be less than the amount of total liabilities.
"At every stage, UAE has sought to do what is best for its customers. UAE was,
like so many other ESCOs, a victim of the CCE and BAE bankruptcies, and the
misconduct that led up to them. UAE was transparent with the Department about its
difficulties, and did everything humanly possible to transition to new supply and credit
facilities that would allow it to meet its obligations without disruption to its customers."
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April 9, 2019
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Copyright 2010-19 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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